Interview : Chinua Azubike

What are the challenges in infrastructure financing?

CHINUA AZUBIKE: There are multiple and interrelated challenges facing infrastructure in Nigeria, largely due to political and macroeconomic constraints, and a dearth of capacity to develop and finance projects. The infrastructure finance market is also fragmented, with no proper link between project phases. A feasibility study backed by an investor would not necessarily cause a bank to finance a project. The commercial banking sector does not have much appetite for large project loan assets due to liquidity constraints and post-financial crisis regulation. This prevents banks from providing long-term financing, creating an asset-liability mismatch.

This is likely to be further accentuated with the roll-out of Basel III in 2018, which is set to further increase the cost to allocate capital for projects, thus reducing the willingness of many banks to do so by applying a high risk weighting to long-term loans. Lastly, high Treasury bills and bond yields of up to 18% in recent years deterred institutional investors from looking at other investment opportunities, such as those in infrastructure, which are still considered to be too risky.

How is infrastructure financing developing?

AZUBIKE: Until now, long-term local currency financing for infrastructure was almost non-existent. InfraCredit guaranteed Viathan Engineering’s successful issuance of a 10-year corporate infrastructure bond in December 2017, which raised N10bn ($32.3m) at a yield of 16%. This has proven that it is possible to raise such tenor of local currency and is a major milestone for the country, generating increased market appetite and investor interest for further transactions of this kind. Because Viathan is backed by private equity firm Synergy Capital Managers, early-stage investors in such projects can rely on a local financing value chain connecting them to the capital markets for debt refinancing or partial exit financing. There was no such level previously, which was not encouraging for greenfield infrastructure investors.

Proving the existence and willingness of investors encourages project developers to finance assets. This connection between long-term funding and eligible assets should attract more institutional investment. It also shows foreign investors that local partners can select the right types of assets, share risk and access long-term financing from pensions with credit enhancement tools. Now that the model has proven successful, it can be replicated in other asset classes with long-term, predictable and contractual cash flows, such as utilities, waste management and transport infrastructure.

How can capital markets help to drive investment?

AZUBIKE: The availability of long-term infrastructure financing is dependent on the existence of developed local debt capital markets. This provides assurance that tradeable debt instruments are available for financing or refinancing existing projects, and ultimately reduce their cost of capital and extend tenor. Domestic debt capital markets have maturities of up to 20 years and is where capital formation and intermediation with local pension funds can take place. Capital markets also provide an additional level of transparency and accountability to the overall financing process.

What will encourage institutional investment?

AZUBIKE: The mobilisation of institutional investors will be critical to financing infrastructure. About 35% of pension funds could invest in quality debt instruments, which represents about $6bn in assets growing 14-15% per year. So far, less than 1% of the assets held by domestic pension funds have been placed into infrastructure. Credit enhancement tools are key to motivating pension funds and other institutional investors into a new asset class like infrastructure; however, a lot of capacity building needs to be done to give institutional investors the technical skills to evaluate and analyse transactions. As their capacity grows, they will require less credit enhancement and will be able to share risk.